After endless scrolling on Zillow and binging home hunting reality TV, you are probably thinking a lot about homeownership. The journey from prospective buyer to getting those house keys can feel exciting, but where do you begin? Whether you’re casually researching or actively looking to purchase a home, Rockland Trust has eight tips to simplify an important milestone—saving for a mortgage down payment.
What is a Down Payment and How Do You Save For One?
Before you can purchase a home, you need to save for a substantial down payment, typically 5 to 20 percent of the home’s total value. This amount is your investment or ownership stake in the house and a contribution toward the purchase of your new address!
While this is most likely one of the biggest purchases you’ll make in your life, saving a down payment is an attainable goal if you start with a plan and do your best to stay on track. It’s also encouraging that the financial sacrifices to save for a down payment are temporary as you invest in your future.
You might be thinking, that all sounds good, but where do I start?
First, crunch some numbers to determine how much you can realistically save for a down payment every month. Calculate your total monthly income from all sources, then subtract your monthly expenses. The difference is what you can tuck away for a down payment, but make sure to give yourself some wiggle room for unexpected costs, like a surprise trip to the vet or replacing your car’s transmission. Resist the temptation to pad your income or make your expenses seem lower than they are; the more realistic your budget is, the more successful you will be in sticking to it.
You Have a Financial Goal? Start Planning to Achieve It
Now that you’ve done the math and arrived at your monthly budget, how do you determine the price range of what you can afford? DIY tools like this Mortgage Qualifier Calculator can help you estimate how high of a mortgage you qualify for and let you experiment with different loan terms and adjustments. For a more personalized picture of your mortgage options, consider scheduling an appointment to talk with a mortgage loan officer.
A mortgage loan officer can also assess your unique situation to determine if you qualify for state or local homebuyer programs. These loan programs help first-time and low-income buyers get into homes by offering down payment assistance or other benefits. While down payment assistance may sound ideal, there are benefits to putting the full 20% down. You will avoid purchasing mortgage insurance (PMI) and build equity in your new home immediately! Your monthly mortgage payments will be lower as well, which is always a bonus.
3. Determine your down payment goal
You know how much house you can afford, so it’s time to do some math to get the down payment figure you need to save. Imagine that you qualify for a mortgage of $360,000. Typically, down payments are 20% of the home’s total value. If $360,000 is 80% of the total home cost, then $90,000 is 20% of the total home cost. This means that you would need to save $90,000 for a down payment on a home that costs $450,000.
Now that you know your monthly budget and down payment figure, you can piece together a homeownership timeline. Divide the down payment cost by your monthly savings budget to arrive at the number of months it will take you to save. Don’t be afraid if the number of months seems like a long time — plenty can change, like your income, so this timeline can adjust as your budget does. Let the countdown begin!
Creating a separate, high-yield savings account for your down payment, such as a money market or certificate of deposit, allows your money to grow more quickly than a traditional savings account. Make monthly contributions to this account automatically through direct deposit. This helps you regularly contribute to this account, and it’s harder to miss money that you never set eyes on!
The most straightforward way to save more money is to make more money! If the circumstances and timing are appropriate, consider requesting a raise or promotion at work. If this isn’t an option, think about taking on a second job or turning your hobby into a side hustle. Get creative and contemplate whether your skills and passions could translate into a business, online shop or service.
There may also be valuable odds and ends around your home that you can sell for an extra boost. If you’re lucky enough to have generous family and friends who offer you money to meet your goals, tuck it away in your down payment account! The same goes for other unexpected (but welcome) income such as stimulus checks, inheritance, salary bonuses, etc.
On the flip side, reducing your spending can be an equally effective way to increase your savings. Prioritize paying down high-interest debt to free up some savings and track your discretionary spending using online banking. Reducing your debt-to-income ratio can also impact portions of your buying process — be sure to keep your mortgage loan officer in the loop about any changes to your financial situation throughout the process.
Keeping an eye on where your money goes allows you to identify patterns and potential areas to decrease spending. It’s also a good idea to pause non-essential subscriptions, such as streaming services or meal deliveries, and check the rates of your car insurance, renter’s insurance, health insurance, cable, internet and phone plan to look for possible deals or discounts.
Pro Tip: Use cash for small everyday purchases like your morning coffee. If you’re out of cash, opt out! Using cash also helps you squirrel away the change.
It takes discipline and small sacrifices to cut back on non-essential purchases, but it helps to keep your long-term goals front and center in your mind.
Prioritize Your Spending in 5 Easy Steps
Saving enough for a down payment is a significant undertaking, so it’s important to pace yourself and be patient. Remember that steady, incremental progress adds up. Break up your total savings goal into smaller chunks and treat yourself to whatever makes you most happy when you reach each one.
Avoid the Pitfalls of Financial Stress
You’re not alone - we are here to help!
We have proudly served the community’s banking needs for years, helping thousands of eager folks purchase homes of their own. Our mortgage loan officers are happy to help guide you through the process, build a plan that works with your unique financial situation and answer your specific questions. The Learning Center also offers tips for purchasing your first home, renovating and other articles that help you lead your best financial life.
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